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Netflix common stock has a? beta=0.6. The? risk-free rate is 9%?, and the market return is 14?%. a.??Determine...

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Finance

Netflix common stock has a? beta=0.6.

The? risk-free rate is 9%?,

and the market return is 14?%.

a.??Determine the risk premium on Netflix common stock.

b.??Determine the required return that Netflix common stockshould provide.

c.??Determine? Netflix's cost of common stock equity using theCAPM.

Answer & Explanation Solved by verified expert
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Information provided:

Beta= 0.6

Risk free rate= 9%

Market return= 14%

a.Risk premium= Market return - Risk free rate

                              = 14% - 9%

                              = 5%

b. The required return on Netflix common stock is calculated using the Capital Asset Pricing Model (CAPM)

The formula is given below:

Ke=Rf+b[E(Rm)-Rf]

where:

Rf=risk-free rate of return which is the yield on default free debt like treasury notes

Rm=expected rate of return on the market.

Rm-Rf= Market risk premium

b= Stock’s beta

Ke= 9% + 0.6*5%

     = 9% + 3%

     = 12%

c.The cost of common equity is also 12% computed using the capital asset pricing model

In case of any query, kindly comment on the solution.
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Netflix common stock has a? beta=0.6.The? risk-free rate is 9%?,and the market return is 14?%.a.??Determine the risk premium on Netflix common stock.b.??Determine the required return that Netflix common stockshould provide.c.??Determine? Netflix's cost of common stock equity using theCAPM.

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